Discussion:Misc. income not subject to SE tax

I know - in some cases it is ok with no PR Tax - but not very many.

Congress never mandated the IRS on this one. The highest up the chain you will find probably (other than Batok and others) is Rev. Rul. 87-41. Perhaps 530 might apply.

Not a "regular and consistent basis", how come the amounts "have always reported this on line 21"? Sounds consistence year to year to me.

If the individuals are not peforming services for the amounts reported on the 1099, then for what purpose are the amount paid?

Is not $400 the cutoff amount?

The original poster has not stated in what box of the Form 1099 Misc the amounts were entered. I am going to infer that the amounts were in box 7, in which case the tax professional should have his client request a corrected Form 1099 Misc, because the Form 1099 Misc is improperly prepared.

No need to read court cases in this area of the law, the law is very clear.

Code follows, if the income is not trade and business, the income does not fall under the definition, such as rents.

Code Sec. 1402. Definitions

(a) NET EARNINGS FROM SELF-EMPLOYMENT

The term "net earnings from self-employment" means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in section 702(a)(8) from any trade or business carried on by a partnership of which he is a member; except that in computing such gross income and deductions and such distributive share of partnership ordinary income or loss--

The facts and circumstances of each case are different; BATOK (Bartok was a composer, DZ, and probably self-employed) was peculiar in that he installed windows for one month in retirement, to help a neighbor as I recall. The Court ruled his activity did not rise to that of a trade or business, but e.g., a gentleman who travels to Lakewood NJ and stands on a corner where businesses go to hire day laborers would certainly be in a trade or business, even if one week that gentleman did gardening while the next week he dug ditches. The OP wants to handle all as one. While Batok may prevent penalties, the case is not a one size fits all, else there would be no Form 8919.

You know someone is in business if the service they provide is normally a service that a business provides.

I would write you about correcting the 1099, because I want the letter requesting the change to show to the IRS if I need to.

As for as Bierberly goes, I think it is a repetitive situation, same payee, same payor.

Direct Seller Audit Technique Guide

Heck, make a case that it is a hobby, profit motive test and all that, Schedule A for expenses.

The question of a "trade or business" is a fact and circumstances guestion, and I would cite Groetzinger v. Commissioner, 82 T.C. 793 as a more complete discussion of the issues.

Roy: he says 'some of his clients' which means more than one. Maybe they are college students given 1099s to paint a building, or retirees to do that same job.

In addition, "have always handled this type of income the same way", begs the question what type of income is it?

I am 100% positive that everyone will agree, that at least some 1099 Misc income should be subject to SE tax.

What is clear the OP did not post all the facts and circumstances. Then the OP stated his conclusions asked for cites to support his position. If the OP had researched the issue why is the OP needing cites?

Fun discussion anyway.

Another example: Client is resident in Chile, which has a totalization treaty meaning that they don't pay SE tax on SE income. But some of her work was performed in the US, so was not excluded as foreign income. The full income went on line 21 and part was backed out with the 2555, and sure enough we got a CP2000 for the balance, even though there were several statements referencing the totalization treaty.

In all these cases the IRS conceded after correspondence, but I'd like to know a way of avoiding the CP2000.

At the risk of beating this to death (because I'm really not clear on some cases): Subject to SE tax or not? TP has a regular job/profession, gets an honorarium for making a speech. Does it make a difference if the speech is about their professional work? Ditto for someone who writes an article. Or someone who writes a book or a song and gets a few bucks a year in royalties (which would go on a sched C if they were SE musicians or writers)?

Moving on from the intellectuals (I live near Cambridge . . .): What about the person who gets paid for some occasional odd piece of work -- cleaning out a garage; fixing up the computer system for their church?

David H

SE tax = about $150.

Prepare inconsistent treatment disclosure form for original 1040. You could skip this if you think it is not needed.

Get letter or proposed adjustment from IRS. Reply to same. Win or lose. If win every thing is find.

If lose, file IRS appeal. Again win or lose. If win every thing find.

If lose, file in court, or pay. On and on..

As a tax professional, I suggest that all of this should be disclosed (in writing, how else are you going to prove you informed the client of all the possibilities) to your client, plus the possibility of various penalties and interest at the time the return is prepared.

How much are you charging for all of this? Are you getting paid for all this work? Is it cost beneficial to your client?

If the amount gets larger and larger, the argument that it is not a business becomes less and less effective. Naturally, this assumes a profit, or there would be no SE tax in question.

Anyway, there is income tax to be paid on the profit.

DavidH

 big happy face   on it (no letter). 30 sec. I fax it to IRS 30 sec.  I scan it into my DMS program. 30 sec. Clients call me in about 10 weeks and take me out for dinner because they saved $100 to $1,000. 1 1/2 hours. I do not even charge the client for the 2 minutes ! Priceless!

Roy, Court, appeals on $600 SE tax.....never. You know it will never happen.

This means zero US self-employment taxes are due - even for work done the US; because they are covered individuals. Is this what you meant?

       Followup:  Then this should apply even if the client doesn't file a 2555, right?
       If I get any more info I'll post again.

David H

David H